It's the festive season in India. The demonic forces have been defeated on Dussehra and Diwali marked the triumphant return of Lord Rama to his kingdom of Ayodhya with his wife. The financial markets are also in a celebratory mood after a rather despondent summer.
It is an appropriate time that we revisit the legend of Rāma, as narrated by Goswami Tulsidas in the epic Ramcharit Manas, to draw some important lessons of life. Incidentally, the epic offers many invaluable hints for managing personal finances.
For example, in the first chapter (
Bal Kanda) itself there are some extremely useful hints for the investors who prefer to invest in equities through a systematic investment plan (SIP). Consider the following: When to start SIP and how long to continue it
सम प्रकास तम पाख दुहुँ नाम भेद बिधि कीन्ह। ससि सोषक पोषक समुझि जग जस अपजस दीन्ह।
The amount of light and the darkness is equal during the new (waxing) moon phase or Shukla Paksha and the dark (waning) moon phase or Krishna Paksha. However, people differentiate between two phases. The fortnight of waxing moon is believed to be benevolent and the fortnight of waning moon is believed to be malevolent.
An SIP investor needs to assimilate that the stock prices move in cycles. The instances of a straight line rise in a stock or index over a long period would be rare, if any. For the SIP investor, the average cost of investing in rising market and falling market would normally be the same. They should therefore not worry about the market cycles. Logically, they should rejoice temporary fall in prices as it allows them to lower their cost of acquisition.
Now the question arises, for how long an SIP should be planned and continued.
The empirical evidence in India suggests that the returns from an SIP stabilise around the underlying asset's long-term average return only after two complete market cycles.
For example, if an investor started an SIP of Rs 1,00,000 per month in Nifty 20 years ago, his returns would have stabilised in 12-15 percent CAGR band only after 12 years, i.e., in 2011. For first five years, the returns were negative, whereas abnormal returns were made for 2 years during 2005-07.
Lessons for investors
For the investors who started the same SIP in 2007, the returns are still far from normal. These investors would be earning less than savings bank interest on their SIP portfolio. It would take a sharp correction of about 30-40 percent in Nifty and a full recovery over the following two years for their returns to normalise to 12-13 percent range. However, if Nifty continues to rise 13-15 percent annually without any major correction for next 10 years, their returns would normalise only after 2028.
The lesson to learn for SIP investors from this are-
(i) The best time to start SIP is today.
(ii) SIP investors should pray for regular market correction and celebrate market crashes.
(iii) SIP investments must continue for at least three complete market cycles. An investor in his 50s must not start an SIP for his retirement planning, but for the college funds of his or her grandchild.
Where to do SIP
An equally pertinent question is, which is the best asset for starting an SIP?
Is it Index Fund or ETF or a portfolio of diversified funds, e.g., large cap, multicap, mid and small cap, etc.?
To help with this problem, Goswami Tulsidas has provided two useful hints.
गगन चढ़इ रज पवन प्रसंगा। कीचहिं मिलइ नीच जल संगा।।
If the dust or a small particle joins the company of the gentle winds, it could elevate itself to the sky. However, if it joins the down flowing water, it turns into filth.
सुरसरि जल कृत बारुनि जाना। कबहुँ न संत करहिं तेहि पाना।।
Sages and wise persons would not consume intoxicating beverage even if it is mixed with sacred water (Ganga Jal).
Firstly, the SIP investors would be better off investing in a high quality progressive asset (gentle winds) for earning normalised stable returns. The temptation to make abnormal returns in short period by investing in low quality assets (down flowing water) is not one of the characteristics of the SIP investors.
Secondly, the selection of asset manager is also very critical. A good asset in the hands of an incompetent or unscrupulous asset manager could be highly intoxicating and would definitely result in destruction of wealth.
Vijay Kumar Gaba explores the treasure you know as India, and shares his experiences and observations about social, economic and cultural events and conditions. He contributes his pennies to the society as Director, Equal India Foundation. Read his columns